The 2020 Guide To Real Estate Crowdfunding
Crowdfunding is so much more than just a simple 21st-century phrase; it is a new, exciting way for real estate investors to raise capital.
How does crowdfunding real estate work?
What benefits can crowdfunding real estate are there?
What do you need to know before looking for real estate investment loans from others?
What returns can I get by investing in another investor’s crowdfunding project?
These are some of the main questions we have been asked, and hope to answer all of these in this article.
Although real estate crowdfunding is not exactly a traditional means of raising your capital, smarter investors will understand this powerful form of real estate financing!
What Is Real Estate Crowdfunding?
Firstly crowdfunding is a way for a business owner to raise capital, not by asking one investor for a huge investment but rather asking a large pool of potential investors, who then contribute smaller amounts of money.
The key difference between crowdfunding and more traditional methods of raising capital is the fact that crowdfunding is almost always done online.
Some of these platforms online include specific crowdfunding websites, however business owners have also been known to turn to social media platforms such as Twitter, Linkedin, and Facebook to market their ventures to a large group of potential investors.
Real estate investors have been adopting the crowdfunding technique as an alternative to more traditional means of financing investments for some time now. For example, large developers are using crowdfunding to solicit their investments from larger accredited investors, at the same time smaller business owners have been known to use the same crowdfunding tactics to raise funds for smaller investment deals, such as individual rental properties.
The fact that this method can be used by both sides of the financial scale is probably the reason its popularity has been booming in the last few years.
Benefits Of Crowdfunding For Real Estate
Whether you are a seasoned real estate investor or someone who is just starting out, you may know that finding, and locking down the necessary financing for your business project can be challenging.
Crowdfunding is an easier way for investors to invest smaller amounts of money, therefore reducing their exposure should a deal fail. There are also several other crowdfunding benefits that have more than just a monetary benefit to the business person. Some of these benefits are:
- Crowdfunding real estate will increase your funding options, at the same time, it will grow your investor network for any future business projects.
- Any direct marketing via a crowdfunding method will automatically double as a way to promote your business.
- Successful projects will almost always lead to a positive ‘word of mouth’ advertisement and will lead to client loyalty over time.
- Crowdfunding is normally quicker than traditional forms of financing, therefore you will usually save time and money by using a user-friendly investment platform.
- You will have access to several forms of feedback from the online community so you can easily identify and address any business flaws you may have.
Each step of the way will provide benefits for you:
Easier Access To Capital
Crowdfunding can offer easy access to new capital and credit without all the usual hassles of getting a loan. It is used for almost all types of fundraising you can think of, from personal, family, and business loans to real estate investing.
Investors can benefit from this form of real estate investment by keeping their personal credit available for other uses, at the same time as keeping their credit scores intact.
This allows small business owners to get their business or company up and running more quickly. Crowdfunding also can be easier to secure funding for business projects when more traditional forms of raising capital are limited.
A Great Marketing Tool
Crowdfunding is not just a great way to benefit financially. This method has several non-monetary benefits such as being a marketing tool for business owners that want to promote their brand.
By promoting different fundraising campaigns on platforms like social media, or directly on crowdfunding websites, real estate investors have an easy opportunity to grow their investor network rapidly.
One great way to promote your business is to show past projects, as well as the returns from these projects. This paired with your company’s mission and goals will help demonstrate your credibility, as well as your professionalism to potential investors.
Building Investor Loyalty
Crowdfunding campaigns are a smart way to prove the appeal as well as the financial viability of your project or idea. By sharing some information about your project or idea, you can attract potential investors and see how viable a certain project is. If you have a good idea and provide a well-rounded plan, this can be a great way to garner support.
Once you have secured your crowdfunding, your contributors will automatically be invested in you. This means that your success will be their success, usually, this means that they will go that extra mile to help you succeed.
By providing your investors with consistent results, you will automatically develop loyalty among your investors, which will ultimately lead to a positive word of mouth marketing. As this is one of, if not the best form of advertisement. You will gain new followers through your own success and not have such a hard time finding investors in future projects.
Multiple User-Friendly Platforms Available
Many of the real estate crowdfunding websites make it very easy for investors to get started with their fundraising campaigns. This means you will overall save some time and money.
These platforms are designed to promote your idea, or project in a visually appealing manner at the same time as reaching a large audience, all without huge effort on your part.
We will discuss some of these platforms later in this post, so keep reading!
Get Valuable Feedback
As crowdfunding platforms are in the public domain, campaigns will get their fair share of reactions, both good and bad! Take the positive message from this which will ultimately give you great feedback as to what worked, and what didn’t.
Sometimes you will get inputs from other, experienced investors, this may be positive or negative, however, any input is good from these individuals. This input will provide you with the feedback needed to identify and fix your business flaws.
Responding, and even thanking users for leaving comments or feedback will help build a connection and potentially open up lines of communication which can be of a huge benefit to you.
It is important also to recognize that there is a steep learning curve for those who have never participated in crowdfunding projects before.
When launching your first campaign, some of the feedback can be a great way to learn how to improve your campaign for any future projects.
Disadvantages Of Crowdfunding
Although crowdfunding may seem like it’s a flawless strategy, it’s important to be aware of the disadvantages that investors will face when funding your project.
One of the biggest challenges you will face when gaining new investors will be the fact that these investors may be unfamiliar with you or your business.
This will almost always lead the investors to hesitate before trusting any form of investment in your project. Even if you have successfully conveyed your project in a confident manner, investors still run the risk of losing their investment, this means that investors may need some more convincing before agreeing to invest in your project.
- Rate of Return
It is quite common for crowdfunded real estate deals to have an investment period of 5 to 7 years. This means that investors will not see any immediate return on investment.
Although there is a long term potential for profits, some investors may view this as a reason not to invest, opting instead for quicker turnover.
- Lack of Control
As investors do not have any form of decision making controls in your crowdfunded real estate property, some investors may not invest as they are not completely confident with placing any investment in your hands.
With that being said, you might find that a more detailed presentation of your project as well as its trajectory will help investors’ hesitations. This may help convince them that the project is worth their investment.
Crowdfunding Investment Limits
In the USA, the US Securities and Exchange Commission has now put regulations in place for non accredited lenders to account for the risks involved with crowdfunded projects.
Depending on a lender’s income, there may or may not be a limit on the amount you can contribute to a crowdfunded project.
At the time of writing: (applicable to the USA)
- Annual income less than or equal to $107,000 per year:
You can invest up to 5% of your income, with $2,200 being the maximum investment allowed.
- Annual income is more than $107,000 per year:
You can invest up to 10% of your annual income with a maximum investment of no greater than $107,000.
Types Of Crowdfunding
If you are already a real estate investor who’s already built up some capital, you may now be looking for ways to earn more passively from this market.
For this type of investor, real estate crowdfunding essentially has two different options, these options are equity investments and debt investing.
Equity Investments: The Pros & Cons
This is probably the more common path for most real estate investors. This is mainly because it provides a higher return on investment than debt investing.
This type of investment does also presents a risk. Equity investments give investors an equity stake in a residential or commercial property, effectively turning them into a shareholder.
If you choose to invest in an equity investment, your return will be based on the rental income of the property you are invested in, minus the fees needed for the crowdsourcing platform, if there is one.
If the investment property is sold, as an equity investor, you will also earn a share of the sale price.
In this investment type, payouts are typically sent out every quarter, however, this does vary so check for your specific situation.
Pros of Equity Investment
The Sky is the limit on returns: You can see (at times) an 18 to 25 percent annual return, with the possibility for more, since equity investments do not have caps on them.
Lower fees: You have the option to pay an annual fee to maintain your shares on the property, instead of upfront fees and monthly fees.
Tax benefits: Since you own a share of the property, you can deduct expenses on it from your annual income tax (e.g. depreciation, repairs).
Cons of Equity Investment
You will always be second for any payouts. If the property fails to be profitable, you will not get any return on your investment.
- Longer Hold Period
If you are looking for more liquidity in your portfolio, then equity investing is probably not the best choice for you. The holding period for this type of investment can usually last for between 5 to 10 years.
Debt Investments: Pros & Cons
This type of investment means that the investor (you) are the lender to the property owner. This means you receive a fixed return based on the interest rate of the owner’s mortgage loan, as well as the amount you have invested in the project.
Payments are usually given every month or quarter but can vary. The difference here is that as a debt investor, you will be the priority during property payouts.
Pros of Debt Investments
- Steady Returns
You are more likely to predict how much & when you will receive payouts. This is because of how the investment is structured. This type of investment can produce potential returns of 8% to 12% annually.
- Less Risk
With debt investments, you have less risk, since the property owner will be the one to secure the mortgage loan. This means if the owner fails to pay the loan, you can recover any losses through a foreclosure action.
- Shorter Holding Time
Debt investments are normally done with development projects, this means that the holding period usually only stretches from 6 to 24 months.
Cons of Debt Investments
- Higher Fees
Once you have decided to invest. The crowdfunding platform may take a percentage of your payout.
- Capped Returns
Debt investments are calculated on the interest rates of the owner’s mortgage loan. Due to this, your yields will be limited.
Best Real Estate Crowdfunding Platforms
With so many crowdfunding platforms out there online, it can be easy to get lost between all the options available.
We would recommend that you pick a platform based on several factors, these include:
- Customer Service.
To start with you will want to stay away from crowdfunding websites that function as nothing more than a listing service. Instead, go for platforms that also act as a broker-dealer, additionally, go for a crowdfunding platform that has previous experience dealing with the type of investments you are looking for.
Once you have cut the number of potential websites down, you will want to look in this group for a website that has a solid venture capital backing. The reason for this is that your investment could be tied up for a long time.
Next, you will want to check how the platforms you found conduct their due diligence. Make sure you ask the important questions, some of which are:
- What kind of documentation does the platform collect for potential deals?
- Does the platform ask companies to provide liabilities or indemnities to investors, should something go wrong?
Finally, you will want to verify that the platform provides high-quality customer service. When you’re researching platforms to do business on, ask them your set of questions. This will give you the opportunity to assess their customer service quality, as well as their willingness to give you the information and assurances you need to proceed with that specific platform.
So, now you have some information on crowdfunding for real estate. You might be now wondering which crowdfunding platforms to consider. To help you get started, here is a list of 6 to start off your considerations, however, we recommend that you start with these, and use the one that suits you.
With a minimum requirement of only $5,000, RealtyShares is a tech-enabled platform that allows borrowers to present their projects to accredited investors. For investors, on the other hand, you can look into a market of pre-screened residential, commercial, retail, and mix-use properties.
This platform caters to both equity and debt investors. RealtyMogul also features a $5,000 minimum investment. This platform puts investors protections at the top of their priority list, making sure that all investment opportunities are vetted.
This is a great platform if you are looking at investing in commercial retail property, or single-family style residential projects. The minimum investment once again is $5,000. For borrowers, this crowdfunding platform has professionals who can lend a helping hand with raising capital for a project.
This website is a peer-to-real estate lending marketplace that aims to provide a bridge between investors and borrowers. Normally on this website, investors are looking for high-yield, short term investments, while borrowers are looking for rehabbing funding
This platform acts as an online marketplace, with some investments available for as low as $5,000. Since this platform was established in 2012, this platform has connected countless property owners with investors.
For those of you looking to get involved in commercial real estate, then the Prodigy Network is probably a good platform for you. The minimum investment on this website is $10,000, however, their extensive vetting process will help give you peace of mind with any investments you choose to make.
Crowdfunding real estate is becoming more and more popular, and probably for a good reason. When used correctly, crowdfunding can benefit both investors, as well as those looking to receive funding.
As one of the newer trends, be sure to do as much research into crowdfunding platforms as possible, due diligence is, as always, required when making any investments.
If you would like to try a non-traditional way of investing in real estate, then crowdfunded real estate may be the perfect match for you.
Do you have a lack of funds which is keeping you from investing in real estate? Don’t let it!
One of the most common obstacles we see with many new investors is the difficulties in finding funding. Crowdfunding may be a way to get around this obstacle. If you are not too sure, give it a try and see if crowdfunded real estate is for you. It might just be your next pathway to a new payday!